Home Improvement Financing: Choosing the Best Option

Home owners today have many resources to look for home improvement financing. Most options will be cheaper if you use the equity you have in your home for a secured loan. However, there are also options for unsecured loans that do not use the equity in your home. Depending on the amount of risk you are willing to take and the total amount of financing you need, both options are viable.

Secured Home Loans

A secured loan uses an asset as collateral. For home improvement financing, the asset used is typically the home itself. This is usually extended in a home equity loan. Home equity loans are installment loans up to the amount of home equity you placed as collateral. This sum is then paid off with monthly payments toward the principal. You may also consider a cash-out mortgage. In this option, you take another mortgage for the value of your home, pay off your first mortgage, and keep any cash left over that you had originally built up in equity. Secured loans like these will have lower interest rates. However, you are assuming the risk of the loan meaning you will lose your home in case of default.

Unsecured Home Loans

Unsecured home loans do not use collateral. These loans are more expensive because they have interest rates. However, you are passing the entire risk of the loan to the lender. Unsecured home loans can be accessed through personal loan lenders. Your credit score and financial history will be assessed rather than the equity you have in your home. The better your credit score, the better the terms of the loan. One key advantage of unsecured loans is they will ultimately build your credit more than if you elect a secured loan. You need to ask yourself if you would rather save money on the loan or remove some of the risk for yourself. If you are risk-averse, an unsecured loan may be better. 

Revolving Credit Lines

Revolving credit lines are different than installment loans. Revolving lines are like credit cards: you receive credit up to a certain limit, but you may choose when and how to utilize that credit. At any point, you can pay down the balance. The most common home improvement financing option through a revolving credit option is a home equity line of credit. This allows you to use the equity you have in your home to determine the limits on your credit card. Home improvement store credit cards are also revolving credit lines you may access to secure your home improvement loan. If you are purchasing supplies yourself from a store, this option will be very flexible for you. However, it will only work if you are buying all supplies from the same location and either paying for labor out of pocket or doing it yourself.